A shrinking world economy in 2009

Developed countries beware; the world’s economy is heading towards a ‘deep recession’. This financial crisis has the ability to batter economic activity into submission. The International Monetary Fund (IMF) expects the world economy to shrink by at least 0.5%. The IMF released its twice-a-year World Economic Outlook report and things are looking bleak. This is in contrast with their optimistic thinking in the beginning of this year when they had announced that world output would increase by 0.5%.

In the report that the IMF had presented to the G20 (a group of finance ministers and central bank governors from 19 of the world’s largest national economies, plus the European Union), they forecast a shrinking world economy and that advanced economies will have declines of between 3% and 3.5% in 2009. The other predictions are that 2010 will see nearly no growth – 0% to -0.5%.

The G20 as a group is adding 1.8% of their GDP to boost their respective macro economies. The EU, however, is only contributing 1%.

The big fiscal stimulus packages that developed countries are implementing may not do much to boost their flagging economies. The UK’s financial deficit is the biggest among the G20 countries.

The financial crisis should be subdued

The IMF gave developed nations more warnings: their governments should intervene in the economies if they want to avert a bigger crisis. The recession will be worse and more prolonged if governments do not work towards stabilising their economies.

The IMF expects financial turmoil, negative incoming data, and lowered confidence if nothing is done to stabilise financial systems. The economy of Japan may lose the most this year – 5.8%, compared to the EU as a whole – 3.2% – and the US with 2.6%.

The ‘key priority’ is to restore lending but that can only happen if the financial system’s inefficiencies are eliminated.

The Eastern Europe challenge

The biggest challenge is that emerging markets may have restricted access to finance; banks and investors in rich countries could withdraw their money.

Eastern European countries fall into this category, especially the Baltic states: Hungary, Romania and Bulgaria. Emerging countries that rely on cross-border finance will be the hardest hit. Romania may receive a rescue package from the IMF sometime this year.

Countries that rely on manufacturing exports – East Asian countries may fall into this category – are also reeling from the decline in trade. Developing and emerging market countries may grow by 1.5% to 2.5%. These countries are suffering the biggest downward revisions.

Financial boosts to a limping economy

Many countries are trying to cure their banking sectors and they are also trying to boost spending. These two should help to boost the economic growth. The IMF recommended that the G20 countries spend 2% of their GDP on their fiscal stimulus programmes; G20 countries will spend 1.8%.

Fiscal expansion in 2009 will add a 2.4% boost to GDP and 2% to world growth. Depending on whether the IMF adds China and India’s figures to their calculations, we could see seven million new jobs this year.